• Tesla vs. GM: On the Early Years of the Electric Car Wars

    Tim Higgins Looks Back at Detroit’s Reaction to Elon Musk’s Upstart

    Dan Akerson did not want to be spotted driving around Detroit in a Tesla Model S. But by the middle of 2013, the chief executive of General Motors needed to know what all of the fuss was about over the electric sedan named Motor Trend Car of the Year—the title the Chevrolet Volt, GM’s own answer to Tesla, had won just two years earlier.

    Despite critical success, the Volt was a sales laggard whereas the Model S had fueled Tesla’s first quarterly profit and was giving new credibility to the idea that Elon Musk could bring out a next-generation electric vehicle for the everyday driver. Tesla ended the first half of the year having sold 13,000 Model S sedans and valued at $12.7 billion by the stock market, or more than three times more than when the year began. Elon Musk was talking about sales of the Model S reaching 35,000 a year in 2014.

    Akerson, a former Navy officer and telecom executive, had joined the automaker’s board as part of the company’s bankruptcy reorganization in 2009, in the wake of the Great Recession. He became CEO ahead of GM going public again in the fall of 2010, weeks after Tesla’s IPO suggested an improving market. From his earliest days on the board, it was clear Akerson wasn’t impressed with what he found at GM.

    While the bankruptcy had wiped away billions of dollars in debt and put GM on firmer financial footing, Akerson was convinced the company needed an injection of new thinking. The managers who were left over seemed too inward-looking, too slow to adapt to a world that no longer moved at the carmaker’s plodding pace.

    Why should Tesla reap the benefit of innovations GM had arrived at first?

    Akerson saw the Model S being greeted in Detroit with the kind of derision that the American car giants had once reserved for the likes of Toyota, back when Japanese automakers were the upstarts. He saw how that had turned out for GM; he knew it was time to investigate.

    The list of reasons, among car experts, for why Tesla was a one-trick pony and was destined to fail was lengthy. Yes, Tesla brought out an amazing Model S, costing on average $100,000. But it had taken Musk and his team years of sole focus to get it to market. The next product would be more constrained, with the company under greater pressure to get it out quickly, all while facing the challenges of continuing to build the Model S. Could Musk keep all those balls in the air and not go broke while trying? Unlikely.

    Still, Akerson was convinced that GM’s R&D team had become stale, spending time on projects that had no future for the automaker. It couldn’t sweep away its modern history of failing to industrialize on its ideas. There was the EV1, for example. GM had conceived of placing the batteries on a flat, skateboard-like frame beneath the car, but the idea was discarded by GM’s engineers for the Volt in favor of a T-shaped battery pack that sat inside the cabin, eating up back-seat space. Tesla had seized upon the idea of a skateboard battery pack, using it to create the Model S’s spacious cabin. Why should Tesla reap the benefit of innovations GM had arrived at first?

    Shortly after becoming CEO, Akerson made a point to visit the R&D operation in the automaker’s spacious campus north of Detroit, in a suburb named Warren. He found that the majority of the team had master’s degrees or PhDs; they celebrated each newly received patent as a career high, accompanied with a bonus from GM. The automaker ranked among the largest holder of new patents in America each year—$7.2 billion was spent in 2013 alone on R&D. Nominally, Akerson was there to congratulate the new patent holders. He posed for a photo with one engineer who’d already racked up several patents while at GM. But their innovations weren’t making their way into GM vehicles. This burned at Akerson. How could that be?

    Another issue sure to eat at Akerson was his perception that GM had failed to take proper advantage of the cellular phone technology built into its vehicles. The company’s response to the rise of personal technology in the 1990s had been the development of OnStar, a phone signal transmitted by the car that allowed drivers to ask an operator for help or directions. Musk had proven that such a connection could be used for so much more. The Tesla Model S could have its software updated remotely that way, or through the user’s home wireless internet. This allowed engineers and programmers to make improvements to the sedan after it was sold, without necessitating a burdensome trip to the shop. A part, for example, might be wearing out, but it could be saved by programmers if they changed the car’s code to reduce the torque applied to it.

    “I had a Tesla. I was one of the first cats with a Tesla. But I’m telling you, I’ve been on the side of the road a while in that thing. And I said to them, ‘Look, guys, why am I always stuck on the side of the f——road? Make it work, one way or another.’”

    This ability became critical for Tesla in the fall of 2013, when a string of Model S fires began raising concerns about the safety of a vehicle with thousands of lithium-ion cells onboard. The first fire occurred in October, near Seattle. A Model S ran over debris on the road that damaged the underside of the car, puncturing the vehicle’s battery pack (legitimizing Peter Rawlinson’s earlier concern, back when he and Musk had fought over millimeters of car height). No one was injured but the fire department struggled to extinguish the flames—an effort caught on cell phone video and circulated on the internet. A second Model S caught fire in Mexico, then a third in November, in Tennessee, piquing the interest of the National Highway Traffic Safety Administration. The reports fed into a long-held concern about the safety of using of lithium-ion batteries to power cars—a concern Tesla’s own engineers had worked to address from the start.

    It was the kind of controversy that GM engineers had feared for their own cars; their worries seemed well founded. Tesla’s share prices plummeted. To top it off, that fall, actor George Clooney, whose early interest in Tesla had been used in publicity by the company, complained to Esquire about his Roadster’s reliability. “I had a Tesla. I was one of the first cats with a Tesla. I think I was, like, number five on the list. But I’m telling you, I’ve been on the side of the road a while in that thing. And I said to them, ‘Look, guys, why am I always stuck on the side of the f——road? Make it work, one way or another.’”

    Tesla’s engineering team got moving. As they studied the fires, they realized that the car’s low height off the ground increased the statistical likelihood of running over something that would puncture its batteries. Thousands of other cars might pass over the same road debris, but because their underbodies sat fractions of an inch higher, the odds of damage dropped dramatically. Tesla engineers calculated that if they used the car’s suspension to lift the body up just a smidge, the chances of striking debris would be reduced. They changed the software and sent it out to the fleet that winter. It worked, buying them a few months to come up with a thicker plate to protect the battery pack. In the meantime, reports of car fires quickly disappeared.

    GM hadn’t proven as nimble with its electric vehicles. Even though the Chevrolet Volt had been a win for GM, at least in securing funding from the government and in the world of public relations, Akerson looked at the car with frustration that it hadn’t caught on better. He owned one and thought it was impressive, bragging to his golf buddies about how he rarely bought gasoline, yet could still take a road trip. GM had made something unique, yes; but they had also brought to market a $41,000 (before the $7,500 federal tax credit) family sedan that was full of compromises, including looks, performance, and roominess. The back seat only fit two people—it might be able to take a road trip, but not a very enjoyable one.

    Not so the Model S. Its exterior was on par with a Porsche, its interior on the level of a Mercedes E-Class. And the real kicker: Tesla’s battery range was almost as good as the Volt’s range with gasoline. Musk’s vision was generating justified questions from Wall Street about whether traditional automakers could compete with Silicon Valley.

    As Akerson drove the Model S, he couldn’t deny he was impressed. “It’s a damn good-looking car. We  ought to build that one and put a combustion engine in it,” he said the first time he saw one. “We’d do well.” Convinced this could be the next threat to GM, Akerson quietly created a team within the company to study how Tesla might bring down the behemoth automaker.

    Akerson’s task force, made up of about a dozen high-potential managers in their thirties and forties representing different parts of the company, could tell Akerson was different from other GM executives they’d dealt with. He came from the world of telecom. He knew the world could change in an instant when the right technology emerged. “That newly crowned leadership group saw a world of change,” a task force member said. “They knew it was coming quickly.”

    Akerson quietly created a team within GM to study how Tesla might bring down the behemoth automaker.

    The engineers remained dismissive of Tesla’s battery technology, raising concerns about the types of cells being used and the risk of fire they carried. They also worried about the giant touch screen in the middle of the dashboard, saying it posed a danger of distracting the driver. The managers also questioned the legality of Tesla’s sales strategy of selling directly to buyers and avoiding franchise dealers.

    There was also this: It cost $100,000. GM didn’t have a single vehicle that started at a price comparable to that of the Model S. In fact, few carmakers in the US did. The 2012 Mercedes-Benz S-Class, the German automaker’s top-of-the-line large sedan, started at $91,850 and ranked as the best-selling vehicle at that price point, with 11,794 sales in 2012 in the US Tesla had long promised a $50,000 Model S, but actually delivering a car at that price was going to be nearly impossible with the inherent cost of batteries. As Tesla announced its first profitable quarter in 2013, it quietly killed off plans for a base Model S, one with a smaller, 40 kWh battery pack. The company justified the decision by saying only four percent of orders were for the cheaper version of the car anyway. Those customers’ orders would be honored with a Model S with a larger 60 kWh battery pack, though its range would be limited by software.

    As 2013 neared an end, Tesla was on pace to sell almost 23,000 Model S sedans—more than the 20,000 it had promised. In the US, the Model S was outselling the Mercedes-Benz S-Class, an arguably more luxurious and better-made car. The Model S was redefining what luxury was to a certain buyer. Tesla was creating a new kind of market segment—one for buyers excited about technology and the perceived virtue that came from driving a “green” vehicle. Musk was predicting a more than 55 percent sales increase in 2014, to more than 35,000 units, as Tesla pushed Model S sales into Europe and Asia.

    GM engineers watched all this and grumbled. They, too, could have delivered a $100,000 sedan; their product planners had never even imagined such a market existed. Within the task force, some thought that Tesla was destined to remain a niche, something wonderful for wealthy Californians but impractical for wide swaths of the world. They questioned whether the startup was ready for mass production of vehicles, which would amplify any quality problems it faced in its factory.

    Rather, Tesla might be a harbinger of another threat. Might well-funded Chinese automakers use the Tesla playbook to enter the US market? For years, industry insiders had fretted about the Chinese gaining the manufacturing might to compete in the US—it was seen as only a matter of time. Several had already made pledges to be in the US by certain dates, but those plans were seemingly missing a key component: distribution. Established automakers had a huge moat around them, with thousands of franchise dealerships selling and servicing their cars. If Tesla could prove that you could sell cars directly to customers through a handful of company-run shopping mall stores and a zippy website, why couldn’t a Chinese car company do the same and kill Chevrolet on pricing?

    Tesla’s stores became a key interest for a segment of the task force. Spies from GM were sent to observe the shopping experience. They took note that stores might have one or two vehicles on hand for a test drive, but that Tesla was sending buyers to a computer to build out what their order might look like. As they watched, it seemed many shoppers were looking at the Model S as maybe a third car—not a daily driver. Compared to competitors, Tesla was among the best with visual aids in its stores, but it ranked among the worst in such basic sales functions as asking a prospect’s name, offering a test ride, or discussing financing options.

    They also questioned how Tesla planned to service a growing fleet of customer cars without dealers. Despite glowing marks from the media, several owners were reporting problems. Edmunds.com, which provides car shoppers with reviews and sales data, bought a Model S in early 2013 and kept a running log of issues that it encountered, including seven unscheduled visits to the Tesla service center and one breakdown that stranded the driver. Two visits involved the car’s drive unit, which included the motor and battery pack—pricey fixes. They weren’t alone; one owner claimed five drive unit replacements in the first 12,000 miles. A telltale sign of the problem was a milling noise that came during acceleration, interrupting what normally would’ve been a relatively quiet ride.

    “The people who buy Teslas aren’t just buying basic transportation. They are early adopters and willing beta testers of a shiny new piece of tech.”

    “When I first sat down to write this post, I was all fired up, as I tried to picture myself in an owner’s shoes. If I had to replace the engine on my car twice—hell, even once—I would swear off the brand forever,” the Edmunds reviewer wrote. “But after talking it over with some colleagues, I was reminded that the people who buy Teslas aren’t just buying basic transportation. They are early adopters and willing beta testers of a shiny new piece of tech.”

    To GM’s task force, it seemed like Tesla was going to need to adjust its sales and service strategy as it grew into a broader mass market. Musk had already told the world that Tesla’s third-generation vehicle would have a range of two hundred miles or more, at a fraction of the price. The task force had begun to hear industry gossip suggesting Tesla might be trying to bring the car to market in 2016. They harangued GM’s battery engineering team. How’s Tesla going to get the propulsion cost down so it can sell a car for $35,000 and make money?

    “They can’t,” the engineers replied. “They can’t make a $35,000 car any more than we can.”

    GM was, if anything, better positioned to try. GM should be able to get better pricing on parts, since it bought so many across the company, and the team could reuse components from other vehicles. For the previous two years, teams in Michigan and Seoul had been toiling away on their own next-generation vehicle, and they were excited to have achieved a range of about 150 miles.

    “If you can’t get this to 200 miles don’t bring it out because you’re going to embarrass yourselves,” Steve Girsky, GM vice chairman, told them.

    That fall, GM announced that the company was working on an electric car that could go 200 miles on a charge and cost $30,000 (at a loss to the manufacturer). The message was clear: Detroit had called Musk’s bet.


    Power Play, Tim Higgins

    From Power Play by Tim Higgins. Reprinted with permission of the publisher, Doubleday. Copyright © 2021 by Tim Higgins. 

    Tim Higgins
    Tim Higgins is an automotive and technology reporter for The Wall Street Journal. He appears regularly as a contributor on CNBC. His writing has won several awards from the Society for Advancing Business Editing and Writing, and he is a five-time finalist for the Livingston Awards. After almost a decade reporting on the car business from Detroit, he now lives in San Francisco.

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